Fund manager on Fannie and Freddie: People are going to call this 'The Big Lie'

Getty Images/ Joe Parra
Florida-based equity fund manager Bruce Berkowitz, the founder of Fairholme Capital, has slammed the US government over its handling of Fannie Mae and Freddie Mac.

It's what some people will eventually call "The Big Lie," he said, referring to the best-selling Michael Lewis book and Oscar-winning film "The Big Short."

Berkowitz spoke during a Q&A session with Bill Ackman, the founder of Pershing Square, at the Harbor Investment Conference at the AXA Equitable Building in Midtown Manhattan on Tuesday. Ackman owns common stock of Fannie and Freddie.

During the financial crisis, the mortgage guarantors Fannie and Freddie needed massive bailouts and were taken over by the government.

It has been seven years since the financial crisis, and the companies are still in a state of conservatorship. The government-sponsored enterprises now make billions in profits (about $15 billion collectively), all of which goes directly to the Treasury. Some of that money has been used to pay down the deficit, Berkowitz said. And none of it goes to the other shareholders.

Berkowitz, who owns preferred shares of both Fannie and Freddie and some common stock, said Fannie and Freddie should have been "a replay of AIG." AIG nearly failed during the financial crisis and had to be bailed out by the US government. The insurance giant went public again in 2011, and by the end of 2012 the Treasury had sold its remaining shares.

"The question is: Why wasn't it a replay?" Berkowitz said.

Berkowitz is among a group of investors who have filed a lawsuit against the US government over Fannie and Freddie.

On the litigation side, a big part of the fight centers on what it means to be a conservator, Berkowitz said.

A conservator is someone who is supposed to conserve and preserve and take care of an estate the same way that a doctor is supposed to build a healthy patient. And the government has argued, 'No, no, no. We can do whatever we want as a conservator. We can take the money, we can give it to our cousin, we can put it in a pile, we can light it on fire, we have dictatorial powers ... You cannot stop us from doing anything.' Our argument is, 'You're supposed to be a conservator, right, you're supposed to be like a doctor who's supposed to help the patient, and you're saying, oh, you're a doctor and you can kill the patient, and that's OK because you have the right to kill the patient. You have the right to take the patient's organs and sell them to somebody else for money. That's fine. That's pretty stupid, OK. It's illogical. It doesn't work that way. That's a big part of the fight.

It's hard to fight the government, he added.

"They're being very stubborn over stuff that's pretty stupid," he said.

As part of the litigation, the investors have received over 1 million documents they can't look at. Only their lawyers can see them. There are about 10,000 documents they're seeking, but the government won't give them to the courts, he said.

"They claim it's about national security," Berkowitz said. "They claim it's executive privilege ... We've seen this in other instances where you're guilty you just claim: 'You can't see it. National secret. We can't show you that we're wrong. You can't see it.'"

He expects the investors to get these documents in the next couple of months. He also called it a complicated story.

"There are thousands and thousands of facts. And in some ways, that's bad because it makes the story more confusing," he said. "And there are other stories involved here. Of course this all picks up from 'The Big Short.' And now we're into what some people are going to call 'The Big Lie' as to what's going on."

He added that the investors needed to get more people to understand that it's important.

"Because think about it — If we don't win, what does it mean for the ownership of any security?" he said.

"I mean ownership become an illusion. If some type of regulated entity can be taken over by a few misguided narcissists in the government in order to help somebody do something for their own personal gain, what does it mean to own a bank stock? What does it mean to own an electric utility? Because after all, Fannie and Freddie are just utilities and they should be treated as utilities with a cost-plus model."

Berkowitz said at some point we'll find out "how crazy this whole cover-up is."